Budget 2019: Relaxing provisions of sections 201 and 40 of the Income Tax Act, 1961 in case of payments to non-residents

Section 201 of the Act provides that where any person, including the principal officer of a company or an employer (hereinafter called ‘the deductor’), who is required to deduct tax at source on any sum in accordance with the provisions of the Act, does not deduct or does not pay such tax or fails to pay such tax after making the deduction, then such person shall be deemed to be an assessee in default in respect of such tax.

The first proviso to sub-section (1) of section 201 specifies that the deductor shall not be deemed to be an assessee in default if he fails to deduct tax on a payment made to a resident, if such resident has furnished his return of income under section 139, disclosed such payment for computing his income in his return of income, paid the tax due on the income declared by him in his return of income and furnished an accountant’s certificate to this effect.

This relief in section 201 is available to the deductor, only in respect of payments made to a resident. In case of similar failure on payments made to a non-resident, such relief is not available to the deductor. To remove this anomaly, it is proposed to amend the proviso to sub-section (1) of section 201 to extend the benefit of this proviso to a deductor, even in respect of failure to deduct tax on payment to non-resident.

Consequent to this amendment, it is also proposed to amend the proviso to sub-section (1A) of section 201 to provide for levy of interest till the date of filing of return by the non-resident payee (as is the case at present with resident payee).

These amendments will take effect from 1st September, 2019.

[Clause 49]

For the same reason, it is also proposed to amend clause (a) of section 40 to provide that where an assessee fails to deduct tax in accordance with the provisions of Chapter XVII-B on any sum paid to a non-resident, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of the return of income by the payee referred to in that proviso. Thus, there will be no disallowance under section 40 in respect of such payments.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

[Clause 10]

Extract of Clause 49 & 10 of Finance Bill 2019

49. Amendment of section 201.

In section 201 of the Income-tax Act, with effect from the 1st day of September, 2019,––

(a) in sub-section (1), in the first proviso, for the word “resident” wherever it occurs, the word “payee” shall be substituted;

(b) in sub-section (1A), in the proviso, for the word “resident” wherever it occurs, the word “payee”  shall be substituted;

(c) in sub-section (3), after the words “credit is given”, the words, brackets and figures “or two years from the end of the financial year in which the correction statement is delivered under the proviso to sub-section (3) of section 200, whichever is later” shall be inserted.

10. Amendment of section 40.

In section 40 of the Income-tax Act, in clause (a), with effect from the 1st day of April, 2020,––

(a) in sub-clause (i), after the proviso, the following proviso shall be inserted, namely:––

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso;”;

(b) in sub-clause (ia), in the second proviso, the word “resident” shall be omitted.

Note on Clause 49 & 10 of Finance Bill 2019

Clause 49 of the Bill seeks to amend section 201 of the Income tax relating to consequences of failure to deduct or pay.

The first proviso to sub-section (1) of the said section provides that any person, including the principal officer of a company specified therein, who fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVIIB on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished a return of his income, has taken into account such sum for computing income in such return of income, has paid the tax due on the income declared by him in such return of income and furnishes a certificate to this effect from an accountant in the prescribed form.

It is proposed to amend the said first proviso so as to substitute the word “resident” with the words “payee”.

It is further proposed to make a similar amendment in the proviso to sub-section (1A) of the said section.

Sub-section (3) of the said section provides that no order deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a payment made to a resident shall be made after the expiry of seven years from the end of the financial year in which payment is made or credit is given.

It is proposed to amend the said sub-section to specify that in respect of a correction statement delivered by the assessee under the proviso to sub-section (3) of section 200, no order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a resident, at any time after the expiry of seven years from the end of the financial year in which payment is made or credit is given, or two years from the end of the financial year in which such correction statement is delivered under the proviso to sub-section (3) of section 200, whichever is later.

These amendments will take effect from 1st September, 2019.

Clause 10 of the Bill seeks to amend section 40 of the Income tax Act relating to amounts not deductible.

Sub-clause (i) of clause (a) of the said section provides that where, in case of any assessee, tax is to be deducted at source under Chapter XVII-B on payment of any amount in the nature of interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under the Income-tax Act, which is payable outside India, or in India to a non-resident, not being a company or to a foreign company, and where such tax has not been deducted or, after deduction, has not been paid on or before the due date for filing the return of income, the amount of such sum shall not be allowed as a deduction.

The proviso to the said sub-clause specifies that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

It is proposed to insert a second proviso to the said sub-clause so as to provide that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of the said sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the first proviso to sub-section (1) of section 201.

It is further proposed to make a similar consequential amendment in the second proviso to sub-clause (ia) of clause (a) of section 40 to omit the word “resident”.

These amendments will take effect from 1st April, 2020, and will, accordingly, apply to the assessment year 2020-2021 and subsequent assessment years.

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